Hawaiian Electric Industries : Q1 2024 Hawaiian Electric Industries, Inc. Earnings Conference Call Transcript

Hawaiian Electric Industries, Inc. NYSE:HE

FQ1 2024 Earnings Call Transcripts

Friday, May 10, 2024 8:30 PM GMT

S&P Global Market Intelligence Estimates

		-FQ1 2024-		-FQ2 2024-	-FY 2024-	-FY 2025-
	CONSENSUS	ACTUAL	SURPRISE	CONSENSUS	CONSENSUS	CONSENSUS
EPS Normalized	0.54	0.38	(29.63 %)	0.54	2.00	NA
Revenue (mm)	NA	NA	NA	NA	3736.10	NA

Currency: USD

Consensus as of Apr-30-2024 7:17 AM GMT

- EPS NORMALIZED -

	CONSENSUS	ACTUAL	SURPRISE
FQ2 2023	0.55	0.50	(9.09 %)
FQ3 2023	0.54	0.56	3.70 %
FQ4 2023	0.49	0.48	(2.04 %)
FQ1 2024	0.54	0.38	(29.63 %)

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Contents

Table of Contents

Call Participants	3
Presentation	4
Question and Answer	7

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HAWAIIAN ELECTRIC INDUSTRIES, INC. FQ1 2024 EARNINGS CALL MAY 10, 2024

Call Participants

EXECUTIVES

Dane A. Teruya

Executive VP & Chief Financial Officer

Mateo Garcia

Director of Investor Relations

Scott T. DeGhetto

Executive VP, CFO & Treasurer

Scott W. H. Seu

President, CEO & Director

ANALYSTS

Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research

Division

Michael B. Lonegan

Evercore ISI Institutional Equities,

Research Division

Paul Patterson

Glenrock Associates LLC

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HAWAIIAN ELECTRIC INDUSTRIES, INC. FQ1 2024 EARNINGS CALL MAY 10, 2024

Presentation

Operator

Good day. My name is Briana, and I will be your conference operator. At this time, I would like to welcome everyone to the Hawaiian Electric Industries, Inc. First Quarter 2024 Earnings Conference Call.

Please note that this call is being recorded. [Operator Instructions]

I will now turn today's call over to Mateo Garcia, Director of Investor Relations. Please go ahead.

Mateo Garcia

Director of Investor Relations

Thank you. Welcome, everyone, to HEI's First Quarter 2024 Earnings Call. Joining me today are Scott Seu, HEI President and CEO; Scott DeGhetto, HEI Executive Vice President, CFO and Treasurer, Shelee Kimura, Hawaiian Electric President and CEO; Ann Teranishi, American Savings Bank President and CEO; and other members of senior management.

Our earnings release and our presentation for this call are available in the Investor Relations section of our website.

As a reminder, forward-looking statements will be made on today's call. Factors that could cause actual results to differ materially from expectations can be found in our presentation, our SEC filings and in the Investor Relations section of our website.

Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures to the closest GAAP financial measure.

Now Scott Seu will begin with his remarks.

Scott W. H. Seu

President, CEO & Director

Aloha kakou. Welcome, everyone. For today's call, I'll start with key updates regarding the Maui wildfires, followed by operational updates and then Scott DeGhetto will walk you through our first quarter financial results before we open it up for questions.

We continue to work in earnest with key stakeholders to help our community recover from the devastating impacts of the Maui wildfires. Last quarter, we discussed Governor Josh Green's One 'Ohana initiative. Which is intended to help the families most impacted by the fires heel and to help our state move forward. The first phase of One 'Ohana launched on March 1 and have seen a steady uptick. 58 total registrations have been received thus far, including 43 from families of [indiscernible] and 15 from injured survivors. On April 29, Governor Green announced that the registration deadline has now been extended to May 31. The governor has said that the deadline for completed claims forms will be July 1.

Hawaii's annual legislative session concluded in early May and last week, the governor signed into law Senate Bill 582, which sets aside critical funding to help address the ongoing Maui wildfire recovery efforts. Including the state's contribution to the $175 million One 'Ohana fund.

Although we are disappointed that we ran out of time in this legislative session to pass legislation supporting the key priorities we laid out on our last earnings call. Our state's lawmakers and leadership remain highly engaged in determining how to design wildfire legislation that makes sense for Hawaii, our customers and our company. Legislation that creates a framework to reduce wildfire risk is critical to ensure Hawaii can attract low-cost capital, which ultimately lowers the cost to customers of needed investments.

Our state's leadership recognizes this. And last week, Governor Green announced the formation of a new climate advisory team that will play a critical role in drafting comprehensive climate resilience policy. As one of its first projects, the advisory team will recommend steps to create a fund to mitigate the impacts of climate change and to develop a fair and comprehensive structure to resolve claims related to future disasters in our state.

The governor has expressed the fund's necessity for stabilizing the insurance market and addressing the financial burdens arising from the increased impacts of climate change.

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HAWAIIAN ELECTRIC INDUSTRIES, INC. FQ1 2024 EARNINGS CALL MAY 10, 2024

We'll continue to work constructively with Governor Green, our regulators and other parties to advance solutions that help keep Hawaii safe and will stabilize our energy feature in the face of increasingly severe weather events.

Last month, we saw the publication of 2 key reports, one from the County of Maui's Department of Fire and Public Safety and the other from Hawaii State Attorney General. Both the Fire department's after-action report and the Attorney General's Lahaina Fire Comprehensive Timeline Report were consistent with our understanding of the events that took place on August 8. Namely that a morning fire appears to have been caused by power lines that fell in high winds. The Maui County Fire Department responded to this fire, reported that it was 100% contained and later declared it extinguished.

A second afternoon fire began in the same area later that day. After Hawaiian Electric power lines in West Maui had been de- energized for more than 6 hours.

Neither of the reports released last month focuses on the cause of the Maui wildfires. The cause of the afternoon fire that devastated Lahaina has still not been determined and is the focus of a separate investigation being conducted by the Bureau of Alcohol, Tobacco and Firearms.

Turning to an update on litigation. As of May 9, HEI and Hawaiian Electric Company have each been named as a defendant in approximately 400 lawsuits by plaintiffs claiming losses related to the August 8 windstorm and wildfires. Subrogation claims from about 160 different insurers with exposure in Maui have also been filed. The Maui Circuit Court has set a September 9, 2024 trial date for 6 cases concerning the fires in upcountry Maui.

As a reminder, those fires were separate from the fires that occurred in Lahaina. The upcountry fires occurred in the Olinda and Kula areas of Maui, over 35 miles from Lahaina. Fortunately, there were no fatalities in the upcountry fires and relatively few structures damaged in comparison to the Lahaina fires. The Maui Circuit Court has also set a November 18, 2024 trial date for 4 of the Lahaina cases filed. No trial dates have been set in cases pending in the Oahu Circuit Court or in Federal port.

Turning to operational updates. On Slide 4. The utility continues to advance wildfire mitigation and resilience efforts. And in the first few months of this year, progressed applications for federal funding to help limit the cost of these investments to customers. In February, Hawaiian Electric received PUC approval for its 5-year $190 million grid resilience plan, enabling the utility to move forward with finalizing $95 million in Department of Energy Infrastructure Investment and Jobs Act funding by matching it with $95 million in rate recovery.

In addition to this, the utility is also pursuing $450 million of matching federal funding for $900 million of projects addressing wildfire focused grid resilience, grid modernization and grid innovation projects. While pursuing these longer-term projects, the utility continues to take more immediate action to address wildfire risk. Over 35% of the utilities 2024 capital budget nearly $120 million is dedicated to wildfire mitigation work. The utility is implementing enhanced wildfire operational strategies and practices, which will include a public safety power shutoff program as a last resort.

Investments are also being made to improve situational awareness through advanced technologies. Including cameras utilizing artificial intelligence. The utility also continues to progress grid hardening work. These interim wildfire safety measures are part of the utility's longer-term wildfire safety strategy, which is being developed collaboratively with our communities and other stakeholders and which we expect to begin implementing in 2025.

Turning to the bank. ASB continues to perform well. And in the first quarter, the bank saw the benefits of the strategic actions undertaken in the fourth quarter of 2023. As you'll recall, last quarter, the bank sold low-yielding securities and reduced high-cost deposits with the proceeds. We saw the benefits from that balance sheet repositioning this quarter as ASB's cost of funds decreased and net interest margin expanded, leading to improved profitability compared to last quarter.

The bank also released a portion of the reserves initially taken following the wildfires on Maui, reflecting Maui's resilient economy and better-than-expected outlook.

ASB's loyal and long tenure deposit base remained stable. And as of March 31, 86% of deposits were FDIC insured or fully collateralized. Customer deposits are safe, and there is no risk to deposits as a result of legal claims related to the wildfires.

I will now turn the call over to Scott DeGhetto, who will discuss our financial results.

Scott T. DeGhetto

Executive VP, CFO & Treasurer

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HAWAIIAN ELECTRIC INDUSTRIES, INC. FQ1 2024 EARNINGS CALL MAY 10, 2024

Thank you, Scott. I'll start with the results for the quarter on Slide 6. We earned consolidated net income of $42.1 million and EPS of $0.38 in the first quarter. This included $7.2 million after tax or about $0.07 per share of wildfire-related expenses net of insurance recoveries and deferrals. Excluding these expenses, core net income and EPS were $49.3 million and $0.45 per share compared to $54.7 million and $0.50 per share in the first quarter of 2023.

Utility net income included $5 million of wildfire-related impacts, net of $7.4 million of insurance recoveries and $5.9 million of deferred costs. The holding company and other segment included $2.3 million of wildfire expenses, net of $1.9 million in insurance recoveries. Net wildfire costs were immaterial to bank net income.

The decrease in utility net income was driven by higher O&M expenses due to increased wildfire mitigation and other wildfire-related costs.

Bank net income benefited from higher net interest margin resulting from the strategic balance sheet repositioning executed last quarter and also benefited from the reserve release that Scott mentioned.

On a consolidated basis, core ROE remains healthy at 9.5%, excluding wildfire impacts. This is down from 10% ROE in the first quarter of last year due primarily to lower utility and other segment earnings, partially offset by higher bank earnings. Utility core ROE was down 20 basis points to 8%, excluding wildfire impacts and bank core ROE was up 7 basis points to about 15.6%.

The approximately $0.07 decrease in the utilities EPS contribution was driven by an $0.11 increase in O&M expenses. $0.05 of the increase was wildfire-related primarily driven by the settlement of indemnification claims asserted by the state.

The remaining O&M increase included higher insurance costs and higher vegetation management costs. Earnings were also driven lower by penalties from worse heat rate performance. These items were partially offset by increased revenues, primarily from the annual revenue adjustment and major project interim recovery mechanisms as well as increased AFUDC and higher interest income.

The approximately $0.02 increase in ASB's EPS contribution was driven by $0.02 of higher noninterest income and $0.02 of lower provision, partially offset by $0.02 of lower net interest income.

Holding company and other segment expenses were higher by about $0.07 per share, primarily from $0.03 per share of lower Pacific Current net income. And $0.02 per share of wildfire expenses as well as a small impact from tax rate adjustments.

Lower Pacific Current net income was mostly driven by a $2.6 million after-taxwrite-off from a fire at Pacific Current's biomass generating facility on Kauai. The fire was started by a contractor performing maintenance on the facility.

Turning to our liquidity on Slide 8. We continue to prudently manage our liquidity as we work through the timing and impacts of litigation related to the Maui wildfires. As of the end of the first quarter, the holding company and the utility had $127 million and $130 million of cash on hand, respectively.

We continue to explore additional sources of liquidity and the utility accounts receivable financing facility we discussed last quarter is awaiting PUC approval. The PUC issued a procedural schedule for the accounts receivable facility docket earlier this week and a decision in order is scheduled for June 24. Once approved, we expect the facility to provide up to $250 million of additional liquidity. At that, let's open up the call to questions.

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HAWAIIAN ELECTRIC INDUSTRIES, INC. FQ1 2024 EARNINGS CALL MAY 10, 2024

Question and Answer

Operator

[Operator Instructions] Our first question comes from Michael Lonegan with Evercore.

Michael B. Lonegan

Evercore ISI Institutional Equities, Research Division

So as you mentioned, the Fire Department report and the HE's investigation report, are consistent with what you've been saying, making the distinction between a morning fire and an afternoon fire. Just wondering, in the event if the ATF's report were to link the afternoon fire to your company, just how are you -- how you are thinking about your approach or your options that you have to that situation?

Scott W. H. Seu

President, CEO & Director

Mike, this is Scott. Yes, we're not going to speculate on what the findings of the ATF's report will be. Once that report comes out, we'll obviously review it very carefully and then make that determination, but we can't speculate right now.

Michael B. Lonegan

Evercore ISI Institutional Equities, Research Division

Great. And then secondly for me, press reports have indicated that you may be pursuing a sale of American Savings Bank. Just wondering if there's anything you could share on that?

Scott T. DeGhetto

Executive VP, CFO & Treasurer

Mike, it's Scott DeGhetto. It's -- my comments are consistent with what we've said in the past. We continue to not speculate on any strategic transactions or alternatives.

Michael B. Lonegan

Evercore ISI Institutional Equities, Research Division

Okay. Great. And then just quickly, lastly for me. Obviously making progress with the first One 'Ohana fund. Just wondering if you have a sense for when the second fund for property owners and businesses could be launched and how it might be funded and if you're planning on making a contribution to that as well?

Scott W. H. Seu

President, CEO & Director

Mike, the only thing we can say is that those discussions are in progress. We can't really say when or provide any details. Those discussions involve many different parties and we absolutely, just in general, we feel that it provides to the extent it can provide an attractive alternative for folks to reach closure as opposed to litigation, then it's worthy of our support.

Operator

Our next question comes from Jonathan Reeder with Wells Fargo.

Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research Division

I was hoping you could just kind of expand a little bit on why you think the legislatures did not pass either the key pieces of the legislation during the regular session. And then would you say the prospects of like a special session being convened to do so are kind of eliminated by the establishment of the [ cat ] team and then would deferring the passage of potential legislation to 2025 would that be too late to provide the clarity and assistance that you all need?

Scott W. H. Seu

President, CEO & Director

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HAWAIIAN ELECTRIC INDUSTRIES, INC. FQ1 2024 EARNINGS CALL MAY 10, 2024

Jonathan, this is Scott. So yes, while we are obviously disappointed that we ran out of time to get the legislature passed we actually feel that we were able to make pretty significant progress across all fronts in terms of the key bills and issues, making it all the way to conference committee. What that really indicated was that there was a high degree of engagement and really a lot of good discussion with legislators in terms of the importance of the 3 initiatives that we were really promoting. And again, so that was the wildfire mitigation work, securitization and then establishment of a going-forward disaster recovery fund.

What we heard in our discussions and all the way up to the very end was there is a lot of understanding that was built over the course of the session of the importance of these measures. What happened, though, was there was still a desire for further details. And I think it was reported broadly that with respect to securitization and the wildfire mitigation plans, there was a request by some legislators for more specific information about what those plans would be, what would be the cost impact on customers and so on.

The climate advisory team that the governor stood up will be very helpful to keep those discussions going in the interim before next year's session. I think it will position everybody, including the legislature better to be able to make these critical decisions and move forward whether or not we have a special session even before then is up to the legislature themselves. But I think the -- it's a very positive that we're going to continue to engage with the key decision makers in the interim.

Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research Division

Got you. That makes sense. I guess the One 'Ohana initiative, at least the first phase, how does that level of participation compared to your expectations? And do you expect it will move materially higher given the deadline was recently pushed back?

Scott W. H. Seu

President, CEO & Director

Well, I think the way that we think about it is that for everybody who has registered that is one more family that will not have to go through the lengthy and unpredictable litigation process. So it's a good number. Of course, we are hopeful that it will continue to get steady uptake. And we will see where we are. And the governor and the others will determine May 31, whether it gets further extended or at that point, if that's where it stops. But overall, I think we're happy that there are at least a number -- a fair degree of interest coming from the families.

Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research Division

Okay. And then like in terms of them being like firmly committed to it, like you remind me is it like the end date like July, which I think currently is July 1 for the completed forms, is that when like you're definitely in or people that have submitted forms, can they still change their mind?

Scott W. H. Seu

President, CEO & Director

Yes. It's a voluntary participation. So at any time, a family can decide to opt out, even if they've registered or started the process. I think that's an important component. We wanted to make sure that families really had the optionality.

Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research Division

Okay. Got you. Shifting gears a little bit, and I may have missed it as Scott mentioned, I apologize, but -- can you talk about the financial ramifications from the issues that the Hamakua Energy being completely out of service since like late February including like the impact on Pacific Current's earnings, the impact on potentially utility earnings from like the higher power costs or the CapEx to replace one of the generators or stuff like that?

Scott T. DeGhetto

Executive VP, CFO & Treasurer

So in terms of Hamakua, we were hoping to get Hamakua, and there's 2 units there. There's a CT-1,CT-2, they're both 30 megs. We're looking to get CT-1 back in the next couple of weeks. What I would tell you is when the plant is not running, yes, we're not generating revenues, but they're also not burning fuel. There is a component, obviously, of O&M that continues to run through. But we're in the process of doing a root cause analysis in terms of what happened there. We currently believe it's tied to a fuel issue. And we'll keep you posted on that.

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HAWAIIAN ELECTRIC INDUSTRIES, INC. FQ1 2024 EARNINGS CALL MAY 10, 2024

Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research Division

Okay. And then I think I heard you say that, that $117 million that's being spent at the utility this year for wildfire-related stuff is 40% of the budget. That implies like $300 million for 2024 utility CapEx. Is that right?

Scott T. DeGhetto

Executive VP, CFO & Treasurer

So roughly -- yes, essentially, as we've mentioned previously, our CapEx forecast historically for 2024, we're forecasting towards the lower end of that range. So that's in the right ballpark.

Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research Division

Okay. The lower end of that $320 million to $430 million range that was last put out or...

Scott T. DeGhetto

Executive VP, CFO & Treasurer

That's right.

Jonathan Garrett Reeder

Wells Fargo Securities, LLC, Research Division

I think any update in terms of like the timing of the ATF report or that's still just completely in their hands?

Scott W. H. Seu

President, CEO & Director

Yes. It's still our understanding that they intend to release the report prior to the 1 year anniversary of the fires, so that would be prior to August 8.

Operator

Our next question comes from Paul Patterson with Glenrock Associates.

Paul Patterson

Glenrock Associates LLC

With respect to the American Savings, what is the tax book? What's the value on a tax basis? Do you have that -- do you guys have that available?

Scott W. H. Seu

President, CEO & Director

Yes, Paul, let me ask if Dane Teruya, our bank CFO can respond to that.

Dane A. Teruya

Executive VP & Chief Financial Officer

On the tax basis, it's roughly around $680 million.

Paul Patterson

Glenrock Associates LLC

Okay. And then with respect to the -- and I apologize if I missed this, the liabilities associated with all these losses, do we have an estimate of what these claims -- obviously, they're just claims, but what they stand out now?

Scott W. H. Seu

President, CEO & Director

No, Paul, we continue to not have that -- there is a lot of complications in terms of determining what that might be, including the resolution of the claims or determination of liability. So complainants would have to prove the degree that Hawaiian Electric acted

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HAWAIIAN ELECTRIC INDUSTRIES, INC. FQ1 2024 EARNINGS CALL MAY 10, 2024

negligently and was the proximate cause of the damages. So again, we're not through that process. We've not concluded that a loss is probable and reasonably estimable. So that's why we have continued to not have -- we have not taken any reserve.

Paul Patterson

Glenrock Associates LLC

I understand, thanks for clarification. I guess what I was just wondering is it sort of an aggregate amount. And I realize that's not what that necessarily would be reflective of what the -- what would actually come about. But I'm just wondering with all these lawsuits, is there some sort of aggregate amount that if you add them all up and obviously, they're not going to be added on, but I'm just sort of curious as to what where -- I mean is it -- am I correct that it's 560, roughly speaking, lawsuits that have been filed so far?

Scott W. H. Seu

President, CEO & Director

Well, as we said earlier, there's been about 400 tort claims. And 160 or so in terms of the subro claims. So it's hard for us to really try and just do a very simple math and come up with a total aggregate amount.

Paul Patterson

Glenrock Associates LLC

Okay. Fair enough. Then I guess I guess my other questions I think have pretty much been answered. In terms of the -- we don't have a sense whether or not they're going to be going for a special session, I guess. Is that -- just a follow-up on -- I forget who asked it, but it sounds like -- there may be one, but it also sounds to me that maybe you were looking towards next year about the securitization of wildfire mitigation legislation?

Scott W. H. Seu

President, CEO & Director

Yes. I think the best way to answer that, Paul, is that we are not the decision makers. We're the ledge in terms of determining if they're going to have a special session. We are gearing up for the next session. I think that's absolutely a true statement. And if we happen to have a special session before then, then better yet.

Operator

This will conclude our question-and-answer session. I will now turn the call back to Scott Seu for closing remarks.

Scott W. H. Seu

President, CEO & Director

Thank you, everybody, for joining our call. We greatly appreciate your interest in HEI and, of course, your support and our hearts continue to go out to our communities here, especially on Maui. So thank you all.

Operator

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.

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